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Rebound Continues: Should You Sell in May Early or Hold Tight?

As we approach the month of May 2025, investors are grappling with a critical question: should you adhere to the age-old adage “Sell in May and go away,” or hold tight in anticipation of a potential market rally? A recent post on X highlights J.P. Morgan’s latest research, which suggests that the recent U.S. stock market sell-off has been primarily driven by equity-related hedge funds significantly reducing their risk exposure. With the market showing signs of a rebound after four months of decline, this analysis delves into whether the traditional “Sell in May” strategy will have a bigger impact this year, or if the market’s recent downturn signals that the adage may not apply this time. Ultimately, should you sell into the current rebound, or hold on and bet on a May rally?

Understanding the “Sell in May” Strategy

The “Sell in May and go away” strategy is a well-known seasonal pattern in the stock market, rooted in historical trends where markets tend to underperform during the summer months (May to October) compared to the winter months (November to April). The rationale behind this adage often points to lower trading volumes during the summer, as investors take vacations, and a general increase in market volatility due to reduced liquidity. However, this strategy is not a one-size-fits-all rule—its effectiveness varies depending on the broader economic environment, market sentiment, and specific events in any given year.

In 2025, the question of whether to sell in May takes on added complexity. J.P. Morgan’s research indicates that the recent market sell-off was largely driven by hedge funds reducing their risk exposure. This deleveraging process—where funds unwind high-risk positions to mitigate potential losses—can create significant short-term selling pressure. However, it also has the potential to clear out market excesses, setting the stage for a more sustainable rebound. With this in mind, let’s explore the current market dynamics and whether the traditional May sell-off is likely to materialize.

Market Context: A Four-Month Decline and a Rebound

As of April 28, 2025, the U.S. stock market has experienced a decline over the past four months, spanning from January to April. This prolonged downturn suggests that the market may have already priced in a significant amount of pessimism, whether driven by macroeconomic concerns, geopolitical tensions, or sector-specific challenges. The fact that hedge funds have been reducing risk exposure further supports the idea that much of the selling pressure may have already played out.

Now, with the market showing signs of a rebound, investors are at a crossroads. On one hand, the four-month decline could indicate that the market is oversold, potentially setting the stage for a meaningful recovery. On the other hand, the looming arrival of May raises the question of whether seasonal patterns will exacerbate selling pressure, leading to a deeper correction. To answer this, we need to assess whether the “Sell in May” effect is likely to be more pronounced this year, or if the market’s recent decline has already absorbed much of the downside risk.

Will “Sell in May” Have a Bigger Impact This Year?

The “Sell in May” effect often gains traction when markets are overvalued or when investors are particularly cautious heading into the summer months. However, in 2025, the market dynamics may not align with a pronounced May sell-off. Here’s why:

1. Hedge Fund Deleveraging May Have Run Its Course
J.P. Morgan’s research highlights that the recent sell-off was driven by equity-related hedge funds reducing their risk exposure. This deleveraging process typically leads to forced selling, which can amplify market declines. However, once this process nears completion, the selling pressure often subsides, allowing the market to stabilize and potentially rebound. If hedge funds have already unwound a significant portion of their high-risk positions, the incremental selling pressure heading into May could be limited, reducing the impact of the “Sell in May” effect.

2. Four Months of Decline May Have Priced in Pessimism
The market’s four-month downturn suggests that much of the negative sentiment—whether driven by economic concerns, interest rate expectations, or other factors—may already be reflected in current prices. In technical terms, the market may be approaching an “oversold” condition, where the selling has been excessive relative to fundamentals. Historically, such conditions often precede a rebound, as bargain hunters step in to buy undervalued assets. If this is the case, the traditional May sell-off may not materialize as expected, and instead, we could see a continuation of the current rebound.

3. Macro and Seasonal Factors
While seasonal patterns like “Sell in May” can influence investor behavior, they are often overshadowed by macroeconomic developments. For example, if economic data in late April or early May 2025—such as inflation reports, employment figures, or Federal Reserve policy updates—signals a worsening outlook, investors may indeed sell off their holdings, amplifying the seasonal effect. Conversely, positive economic surprises, such as better-than-expected corporate earnings or signs of cooling inflation, could fuel a rally, rendering the May sell-off irrelevant.

Does the Recent Decline Mean the Adage Won’t Apply?

The market’s four-month decline raises an important question: has the market already adjusted enough to render the “Sell in May” strategy less relevant this year? If the bulk of the selling pressure has already occurred, the market may be closer to a bottom than a top. In such a scenario, selling into the current rebound could mean missing out on further gains, especially if May turns out to be a month of recovery rather than decline.

Historical data supports the idea that markets often rebound after prolonged periods of decline, particularly when the selling has been driven by technical factors like hedge fund deleveraging rather than a fundamental deterioration in the economy. While past performance is not a guaranteed predictor of future results, the current setup suggests that the risk of a significant May sell-off may be lower than in previous years, especially if the broader economic backdrop remains stable.

Should You Sell or Hold?

The decision to sell into the current rebound or hold tight and bet on a May rally ultimately depends on your risk tolerance, investment horizon, and assessment of the market’s trajectory. Let’s break down the two options:

Option 1: Sell into the Rebound

Selling now could be a prudent move if you’re concerned about short-term uncertainty or believe that the “Sell in May” effect will materialize. For example:

• If macroeconomic data deteriorates—such as rising inflation, a hawkish Federal Reserve, or weakening corporate earnings—selling pressure could intensify, leading to a deeper correction.

• If your portfolio is heavily weighted toward high-risk sectors like technology, which tend to be more volatile during periods of uncertainty, reducing exposure could help mitigate potential losses.

By selling now, you can lock in profits from the current rebound and wait for a better entry point later in the year, potentially after a seasonal dip.

Option 2: Hold Tight and Bet on a May Rally

Holding tight may be the better choice if you believe the market has already adjusted sufficiently and is poised for further gains. Here’s why this approach could make sense:

• The four-month decline suggests that much of the downside risk may already be priced in, and the current rebound could be the start of a more sustained recovery.

• If hedge funds have largely completed their deleveraging, the selling pressure heading into May could be limited, allowing the market to continue its upward trajectory.

• Positive catalysts—such as strong corporate earnings, improving economic data, or a more dovish Federal Reserve—could fuel a May rally, particularly if investor sentiment improves.

To manage risk while holding, you can set a stop-loss order (e.g., selling if the market falls 5%-10% from current levels) to protect against unexpected downturns. Alternatively, you could reduce your position partially to lock in some gains while still maintaining exposure to potential upside.

A Balanced Approach: Cautious Optimism

Given the current market dynamics, a balanced approach may be the most prudent strategy. Here’s my recommendation:

1. Hold with Caution
The market’s four-month decline and the completion of hedge fund deleveraging suggest that the worst of the selling pressure may be behind us. As a result, I lean toward holding positions to capture potential upside in May, especially if the broader economic environment remains supportive. However, it’s critical to stay vigilant and monitor key indicators, such as economic data releases and Federal Reserve statements, which could shift market sentiment.

2. Mitigate Risk
To protect against downside risk, consider setting a stop-loss order to limit potential losses in case the market turns lower. Alternatively, you could reduce your exposure by selling a portion of your holdings, locking in profits while still participating in any further upside.

3. Focus on Fundamentals
Not all stocks and sectors will behave the same way in May. If your portfolio is concentrated in defensive sectors like consumer staples or utilities, you may be better positioned to weather any seasonal volatility. Conversely, if you’re heavily invested in high-growth sectors like technology, you might want to be more cautious, as these areas tend to be more sensitive to market swings.

Additional Considerations

To make a more informed decision, keep an eye on the following factors as May approaches:

• Macroeconomic Data: Late April and early May economic reports—such as inflation, employment, and consumer confidence—will play a significant role in shaping market direction. A worsening economic outlook could trigger renewed selling, while positive surprises could fuel a rally.

• Federal Reserve Policy: The Fed’s stance on interest rates and monetary policy will be a key driver of market sentiment. A hawkish Fed (favoring tighter policy) could weigh on stocks, while a dovish tone (signaling potential rate cuts) could provide a tailwind.

• Corporate Earnings: First-quarter earnings reports for 2025, which are likely being released around this time, will offer insights into the health of corporate America. Strong earnings and guidance could bolster investor confidence, while disappointing results could reignite selling pressure.

Conclusion: Bet on a May Rally, but Stay Nimble

In conclusion, while the “Sell in May” strategy has historical precedent, the unique circumstances of 2025 suggest that its impact may be less pronounced this year. The market’s four-month decline and the deleveraging by hedge funds indicate that much of the downside risk may already be priced in, and the current rebound could extend into May, especially if supported by positive economic developments.

Rather than selling outright, I recommend a cautious hold strategy: maintain your positions to capture potential upside, but set stop-loss orders or reduce exposure to manage risk. By staying nimble and monitoring key market drivers, you can position yourself to navigate the uncertainties of May while capitalizing on any rally that may emerge. If you have specific details about your portfolio or risk preferences, I’d be happy to provide a more tailored analysis. Additionally, if you’d like to dive deeper into recent economic data or market trends, I can search for the latest information to further inform your decision.